Clouds of Europe crisis hang over G20 summit

WASHINGTON: With Europe threatened by serial economic implosions and rising chaos clutching at the Middle East, it makes sense for world leaders to transport their security bubbles to a remote Mexican resort in the next few days - where they might coalesce to discuss Europe and the Middle East.

Los Cabos, a luxury resort on Mexico's Pacific coast, is perfect. A jewel at the southern tip of the Baja California peninsula, Los Cabos is as far away as they could get from nail-biting on the Continent over whether Spain and Italy will follow Ireland, Portugal and Greece into the economic intensive-care ward; and a new stubbornness by old dictatorships and their remnants to move on in Syria and Egypt.

Bringing down barriers … an instructor pushes on the shields of riot police training to provide security for the G20 leaders' summit in the Mexican resort of Los Cabos. Photo: AFP

As an Australian delegation, headed by the Prime Minister, Julia Gillard, touches down tomorrow for this two-day summit of the G20 developed and developing countries, even Mexico's murderous drug wars will seem light years away - across the azure waters of the Gulf of California, on what might be described as mainland Mexico.

In advance of the summit, Gillard and the South Korean President, Lee Myung-bak, have written jointly, calling for resolute action on growth and confidence - for Europe to get its act together and for all the G20 economies to work meaningfully on trade liberalisation.

The Prime Minister will stand apart from many of her fellow leaders, to the extent that she does not share their extreme economic pain. She'll have an opportunity to be heard on the headline issues in several plenary sessions and during the leaders' working meals - but Gillard is not expected to get coveted one-on-one meetings with the United States President, Barack Obama, or any of the other A-team global leaders at Los Cabos.

Europe's spiralling economic crisis is the summit's critical agenda item. But also looming over the gathering is the conflict in Syria and a new Cold War-style enmity between Washington and Moscow, which has become an obstacle to a diplomatic circuit-breaker to the Syrian crisis.

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As the G20 leaders assemble, Greeks will be voting in an election seen by the rest of Europe as a vote for Athens to walk away from the euro, the strained single currency used by 17 of the 27 countries of the European Union.

Spain, the world's 12th biggest economy, edged closer to the brink this week, as markets responded negatively to a €100 billion ($126 billion) European bailout of Spanish banks and Moody's Investor Services downgraded Spain's credit rating - to just a single notch above ''junk'' status. At the same time, the yield on Spanish bonds climbed to 7 per cent, the trigger-point for full-scale bailouts for other troubled eurozone economies by the EU, the International Monetary Fund and the European Central Bank.

Italy too is struggling. Hedge funds reportedly are stacking their bets against recovery, presuming higher yields on Italian government bonds - which rose sharply to 5.3 per cent on Thursday. According to a recent poll, as many as 65 per cent of Italians are sceptical about the euro, suggesting a second country might consider exiting the eurozone.

But for all the G20 leaders' anxiety on Europe, all they will be able to do is vent. The Europeans have made clear that they wish to devise their own reform blueprint at a separate meeting among themselves, to be held at the end of this month.

As Europe's powerhouse economy, Germany is the effective decider on who gets bailed out - and on what conditions. As the eurozone becomes increasingly divided between north and south, the German Chancellor, Angela Merkel, warned this week Berlin would not succumb to pressure from Washington and other capitals to embrace what she described as ''simple'' or ''counterproductive'' quick fixes.

In particular, she rejected the notion of a euro bond, which would replace bonds sold by individual capitals - which might ease interest rates demanded of struggling economies, but would punish the better-performers with rates higher than they pay now.

Demanding reform and austerity of the severity being rejected by many in Greece, Merkel declared: ''I know it is arduous, that it is painful, that it is a drawn-out task. It is a Herculean task - but it's unavoidable.''

Amid so much dithering, the World Bank president, Robert Zoellick, ticked off the Europeans for their inability to deal with the fundamentals of government and bank debt - and for responses that are ''always sort of a day late and a euro short''.

In an interview with the US public radio network NPR, Zoellick criticised European gridlock on sovereign debt, banking and competitiveness. The G20 leaders will share this old Washington hand's anxiety about Europe, but they are on the edge of their seats too over gridlock in the US over what is called the ''fiscal cliff'', a series of critical budget and tax-cutting issues that need to be addressed - but which are being pushed off until early next year, because neither party wants to deal with the inevitable political pain ahead of the November presidential election.

Los Cabos will be the first encounter between Obama and the Russian President, Vladimir Putin, in three years - and it follows what was seen as Putin's calculated snub in refusing to attend a recent G8 summit at the Camp David presidential retreat.

Flashpoints between Moscow and Washington include the stationing of American missiles in Europe and the fate of Iran's nuclear program. But most vexing at present, is what to do about the Syrian President, Bashar al-Assad, who leads Moscow's last client state in the Middle East.

There has been speculation that Obama and Putin may use Los Cabos to clear the air on a range of issues, including Syria. But those hopes took a dive this week with accusations by the US Secretary of State, Hillary Clinton, that Moscow was escalating the Syrian conflict ''quite dramatically'' by shipping more weapons to Syria.

Moscow reacted in fury. By Wednesday, it seemed Clinton was backing down with unnamed Pentagon officials conceding that what were thought to be new combat helicopters being delivered from Russia to the regime, more likely were old machines Syria had shipped to Russia for maintenance.

''She put a little spin on it to put the Russians in a difficult position,'' a senior Pentagon official told The New York Times.